BUSINESS-LEVEL

STRATEGY

CHAPTER 4
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 KNOWLEDGE OBJECTIVES
Studying this chapter should provide you with the strategic
management knowledge needed to:
Define business-level strategy.
Discuss the relationship between customers and business-level
strategies in terms of who, what, and how.
Explain the differences among business-level strategies.
Use the five forces of competition model to explain how above-average
returns can be earned through each business-level strategy.
Describe the risks of using each of the business-level strategies.

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 THE
STRATEGIC
MANAGEME
NT PROCESS

Figure 1.1
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 BUSINESS-LEVEL STRATEGY (DEFINED)

An integrated and coordinated set of

commitments and actions the firm
uses to gain a competitive
advantage by exploiting core
competencies in specific product
markets

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 BUSINESS-LEVEL STRATEGY

Key Issues
Which good or
service to provide

Business-level How to
Strategy manufacture it

How to
distribute it

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 CORE COMPETENCIES AND STRATEGY

Resources and superior capabilities that are

Core
sources of competitive advantage over a
Competencies
firms rivals

An integrated and coordinated set of

Strategy actions taken to exploit core competencies
and gain competitive advantage

Providing value to customers and gaining

Business-level
competitive advantage by exploiting core
Strategy
competencies in individual product markets

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 CUSTOMERS: BUSINESS-LEVEL STRATEGIC ISSUES
Customers are the foundation of successful business-level strategy
Who will be served by the strategy?
What needs those target customers have that the strategy will
satisfy?
How those needs will be satisfied by the strategy?
Selecting customers & deciding their needs, the firm try to satisfy&
how it will do are challenging choices for todays org.

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 CUSTOMERS: WHO, WHAT, WHERE
Firms must manage all aspects of their relationship with customers
Reach: firms success and connection to customers: exp : Amazon.com offer 4.5
million titles & located on tens of millions of computer screen
Richness: depth and detail of two-way flow of information between the firm and
the customer. To build competitive advantage in relations to customers. Exp:
HSBC offer online services allow broader & deeper info based exchanges.
Affiliation: facilitation of useful interactions with customers. Internet navigators
such as Microsoft CarPoint help online client find & sort info to prospective car
buyers.

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 CUSTOMER NEEDSWHO?

Determining the Customers to Serve

Consumer Industrial
Customers
Markets Markets

Market Segmentation

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 CUSTOMER NEEDSWHAT?

Customer Needs to Satisfy

Customer needs are related to a products benefits and features
Customer needs are neither right nor wrong, good nor bad
Customer needs represent desires in terms of features and
performance capabilities
Having close & frequent interactions with current & potential
customers help to identify group & indv current & future needs

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 CUSTOMER NEEDSHOW?

Determining the Core Competencies Necessary to Satisfy Customer

Needs
Firms use core competencies to implement value creating strategies that satisfy
customers needs
Only firms with capacity to continuously improve, innovate and upgrade their
competencies can expect to meet and/or exceed customer expectations across
time
All org must be able to use their competencies (the how) to satisfy the needs (the
what) of the target group of customers(the who) the firm has chosen to serve by
using its business-level strategy.

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 TYPES OF BUSINESS-LEVEL STRATEGY

Business-Level Strategies
Are intended to create differences between the
firms position relative to those of its rivals
To position itself, the firm must decide whether it
intends to:
Perform activities differently or
Perform different activities as compared to its rivals

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 TYPES OF POTENTIAL COMPETITIVE ADVANTAGE

Achieving lower overall costs than rivals

Performing activities differently (cheaper process)
Possessing the capability to differentiate the firms
product or service and command a premium
price
Performing different (valuable) activities

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 TWO TARGETS OF COMPETITIVE SCOPE

Broad Scope
The firm competes in many customer segments
Narrow Scope
The firm selects a segment or group of segments in the
industry and tailors its strategy to serving them at the
exclusion of others

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 SOUTHWEST AIRLINES ACTIVITY SYSTEM

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 FIVE BUSINESS-
LEVEL STRATEGIES

SOURCE: Adapted with the

permission of The Free Press, an
imprint of Simon & Schuster Adult
Publishing Group, from Competitive
Advantage: Creating and Sustaining
Superior Performance, by Michael E.
Porter, 12. Copyright 1985, 1998
by Michael E. Porter.
Figure 4.1
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 COST LEADERSHIP STRATEGY

An integrated set of actions taken to produce goods or services with

features that are acceptable to customers at the lowest cost,
relative to that of competitors with features that are acceptable to
customers
Relatively standardized products
Features acceptable to many customers
Lowest competitive price

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 COST LEADERSHIP STRATEGY

Cost saving actions required by this strategy:

Building efficient scale facilities
Tightly controlling production costs and overhead
Minimizing costs of sales, R&D and service
Building efficient manufacturing facilities
Monitoring costs of activities provided by outsiders
Simplifying production processes

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 HOW TO OBTAIN A COST ADVANTAGE

Determine and Reconfigure, if

control needed
Cost Drivers Value Chain

Alter production process New raw material

Change in automation Forward integration
New distribution channel Backward integration
New advertising media Change location relative
Direct sales in place of to suppliers or buyers
indirect sales
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EXAMPLES
OF VALUE-
CREATING
ACTIVITIES
ASSOCIATED
WITH THE
COST
LEADERSHIP
STRATEGY

SOURCE: Adapted with the permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group, from Competitive Figure 4.2
Advantage: Creating and Sustaining Superior Performance, by Michael E. Porter, 47. Copyright 1985, 1998 by Michael E. Porter.
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 VALUE-CREATING ACTIVITIES FOR COST
LEADERSHIP
Cost-effective MIS
Few management layers
Simplified planning
Consistent policies
Effecting training
Easy-to-use manufacturing
technologies
Investments in technologies
Finding low cost raw
materials
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Monitor suppliers
performances
Link suppliers products to
production processes
Economies of scale
Efficient-scale facilities
Effective delivery schedules
Low-cost transportation
Highly trained sales force
Proper pricing
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 COST LEADERSHIP STRATEGY: NEW ENTRANTS

The Threat of Can frighten off new entrants

Potential Entrants due to:
Their need to enter on a large
scale in order to be cost
competitive
The time it takes to move down
the learning curve

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 COST LEADERSHIP STRATEGY: SUPPLIERS

Bargaining Power Can mitigate (make less)

of Suppliers suppliers power by:
Cost leader operates with
margins greater than
competitors. Being able to
absorb cost increases due to
low cost position
Being able to make very large
purchases, reducing chance of
supplier using power

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 COST LEADERSHIP STRATEGY: BUYERS

Bargaining Power Can mitigate buyers power by:

of Buyers Driving prices far below
competitors, causing them to
exit, thus shifting power with
buyers back to the firm

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 COST LEADERSHIP STRATEGY: SUBSTITUTES

Product Substitutes Cost leader is well positioned to:

Make investments to be first to
create substitutes
Buy patents developed by
potential substitutes
Lower prices in order to maintain
value position

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 COST LEADERSHIP STRATEGY: COMPETITORS

Rivalry with Due to cost leaders advantageous

Existing Competitors position:
Rivals hesitate to compete on basis
of price
Lack of price competition leads to
greater profits

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 COST LEADERSHIP STRATEGY (CONTD)

Competitive Risks
Processes used to produce and distribute good or service
may become obsolete due to competitors innovations
Focus on cost reductions may occur at expense of
customers perceptions of differentiation
Competitors, using their own core competencies, may
successfully imitate the cost leaders strategy

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 DIFFERENTIATION STRATEGY

An integrated set of actions taken to produce goods or

services (at an acceptable cost) that customers perceive
as being different in ways that are important to them
Nonstandardized products
Customers value differentiated features more than
they value low cost

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 HOW TO OBTAIN A DIFFERENTIATION
ADVANTAGE

Control if needed Reconfigure to

maximize

Cost Drivers Value Chain

Lower buyers costs

Raise performance of product or service
Create sustainability through:
Customer perceptions of uniqueness
Customer reluctance to switch to non-
unique product or service
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 VALUE-CREATING ACTIVITIES AND
DIFFERENTIATION
Highly developed MIS High quality replacement
parts
Emphasis on quality
Superior handling of
Worker compensation for
incoming raw materials
creativity/productivity
Attractive products
Use of subjective
performance measures Rapid response to customer
specifications
Basic research capability
Order-processing procedures
Technology
Customer credit
High quality raw materials
Personal relationships
Delivery of products

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 EXAMPLES
OF VALUE-
CREATING
ACTIVITIES
ASSOCIATED
WITH THE
DIFFERENTIATI
ON STRATEGY

SOURCE: Adapted with the permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group, from Competitive Figure 4.3
Advantage: Creating and Sustaining Superior Performance, by Michael E. Porter, 47. Copyright 1985, 1998 by Michael E. Porter.
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 DIFFERENTIATION STRATEGY: NEW ENTRANTS

The Threat of Can defend against new

Potential Entrants entrants because:
New products must surpass
proven products
New products must be at least
equal to performance of proven
products, but offered at lower
prices

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 DIFFERENTIATION STRATEGY: SUPPLIERS

Bargaining Power Can mitigate suppliers power

of Suppliers by:
Absorbing price increases due
to higher margins
Passing along higher supplier
prices because buyers are
loyal to differentiated brand

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 DIFFERENTIATION STRATEGY: BUYERS

Bargaining Power Can mitigate buyers power

of Buyers because well differentiated
products reduce customer
sensitivity to price increases

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 DIFFERENTIATION STRATEGY: SUBSTITUTES

Product Substitutes Well positioned relative to

substitutes because
Brand loyalty to a differentiated
product tends to reduce
customers testing of new
products or switching brands

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 DIFFERENTIATION STRATEGY: COMPETITORS

Rivalry with Defends against competitors

Existing Competitors because brand loyalty to
differentiated product offsets
price competition

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 COMPETITIVE RISKS OF DIFFERENTIATION
The price differential between the differentiators product and
the cost leaders product becomes too large
Differentiation ceases to provide value for which customers are
willing to pay
Experience narrows customers perceptions of the value of
differentiated features
Counterfeit goods replicate differentiated features of the firms
products

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 FOCUS STRATEGIES
An integrated set of actions taken to produce goods or
services that serve the needs of a particular
competitive segment
Particular buyer group (e.g. youths or senior citizens
Different segment of a product line (e.g. professional
craftsmen versus do-it-yourselfers
Different geographic markets (e.g. East coast versus
West coast)

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 FOCUS STRATEGIES (CONTD)
Types of focused strategies
Focused cost leadership strategy
Focused differentiation strategy
To implement a focus strategy, firms must be able to:
Complete various primary and support activities in a
competitively superior manner, in order to develop and
sustain a competitive advantage and earn above-
average returns

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 FACTORS THAT DRIVE FOCUSED STRATEGIES

Large firms may overlook small niches.

A firm may lack the resources needed to compete in the broader
market
A firm is able to serve a narrow market segment more
effectively than can its larger industry-wide competitors
Focusing allows the firm to direct its resources to certain value
chain activities to build competitive advantage

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 COMPETITIVE RISKS OF FOCUS STRATEGIES

A focusing firm may be out focused by its

competitors
A large competitor may set its sights on a firms
niche market
Customer preferences in niche market may change
to more closely resemble those of the broader
market

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 INTEGRATED COST LEADERSHIP/
DIFFERENTIATION STRATEGY

A firm that successfully uses an integrated cost

leadership/differentiation strategy should be in a better
position to:
Adapt quickly to environmental changes
Learn new skills and technologies more quickly
Effectively leverage its core competencies while competing
against its rivals

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 INTEGRATED COST LEADERSHIP/
DIFFERENTIATION STRATEGY (CONTD)

Commitment to strategic flexibility is necessary for

implementation of integrated cost
leadership/differentiation strategy
Flexible manufacturing systems (FMS) computer
controlled process used to produce a variety of products in
moderate, flexible quantities with a minimum of manual
intervention. The goal to eliminate low cost vs. product
variety. Able to change quickly

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 FLEXIBLE MANUFACTURING SYSTEMS

Computer-controlled processes used to produce a variety of

products in moderate, flexible quantities with a minimum of
manual intervention
Goal is to eliminate the low-cost-versus-wide product-variety
tradeoff
Allows firms to produce large variety of products at relatively
low costs

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 INFORMATION NETWORKS
Link companies electronically with their suppliers, distributors, and
customers
Facilitate efforts to satisfy customer expectations in terms of product quality and
delivery speed
Improve flow of work among employees in the firm and their counterparts at
suppliers and distributors
Information networks: by linking with suppliers, distributors & customers. When
used effectively able to better understand customers & their needs. Also critical
to establishment & successful of Enterprise Resource Planning System (ERP) an
info system used to identify & plan resources required across the firm.

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 TOTAL QUALITY MANAGEMENT (TQM) SYSTEMS
Emphasize total commitment to the customer through continuous
improvement using:
Data-driven, problem-solving approaches
Empowerment of employee groups and teams
Benefits
Increases customer satisfaction
Cuts costs
Reduces time-to-market for innovative products

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 RISKS OF THE INTEGRATED COST LEADERSHIP/
DIFFERENTIATION STRATEGY
Often involves compromises
Becoming neither the lowest cost nor the most
differentiated firm
Becoming stuck in the middle
Lacking the strong commitment and expertise that
accompanies firms following either a cost leadership or
a differentiated strategy

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